Imsc - Dbrs Pre Sale

Table of Contents

Structure Summary 1

Transaction Overview 2

Rating Considerations 2

Loan Structural Features 3

Unique Structural Features 4

DBRS Sample 5

Underlying Collateral 7

Owernship & Management 8

Loan Summary – Top Five Loan Details 9

Additional Loans 21

Servicing 21

Surveillance 21

CMBS Methodology 21

Institutional Mortgage Securities Canada Inc., Series 2011-1

Analysts

Matthew Reid+1 312 332 [email protected]

Dan Kastilahn+1 312 332 [email protected]

Erin Stafford+1 312 332 [email protected]

Report Date: January 25, 2011

Press Release: January 25, 2011

1 Presale Report Structured Finance: CMBS

Structure Summary

Commercial Mortgage Pass-Through Certificates, Series 2011-1

Class Description Rating Action Class Amount Subordination Percent Provisional Rating

A-1 New Rating - Provisional $33,100,000 16.750% AAA (sf)

A-2 New Rating - Provisional $138,390,000 16.750% AAA (sf)

B New Rating - Provisional $6,695,000 13.500% AA (sf)

C New Rating - Provisional $8,240,000 9.500% A (sf)

D New Rating - Provisional $14,420,000 2.500% BBB (high) (sf)

E New Rating - Provisional $5,155,000 0.000% BBB (sf)

XA New Rating - Provisional $206,000,000 n/a AAA (sf)

XB New Rating - Provisional $206,000,000 n/a AAA (sf)

Note: The balances of Class XA and XB are notional.

Participants

Depositor Institutional Mortgage Securities Canada Inc.

Mortgage Loan Sellers Institutional Mortgage Securities Canada Inc.

Master Servicer Mildland Loan Services, a division of PNC Bank National Association

Special Servicer Mildland Loan Services, a division of PNC Bank National Association

Custodian Computershare Trust Company of Canada

Placement Agent TD Securities Inc.

Trust Amount $206,000,000

Number of Loans 16

Number of Properties 16

Wtd. Avg. DBRS Term DSCR Trust

1.35x

Wtd. Avg. DBRS Refi DSCR Trust

1.12x

Wtd. Avg. DBRS Debt Yield Trust

9.1%

Wtd. Avg. DBRS Exit Debt Yield Trust

11.1%

Largest Five Loan Concentration 49.6%

Interest Rate 5.313%

Wtd. Avg. Remaining Term 120

Wtd. Avg. Remaining Amort. 360

Wtd. Avg. DBRS Term DSCR Whole Loan

1.37x

Wtd. Avg. DBRS Refi DSCR Whole Loan

1.12x

Wtd. Avg. DBRS Debt Yield Whole Loan

9.1%

Wtd. Avg. DBRS Exit Debt Yield Whole Loan

11.1%

Wtd. Avg. DBRS NCF Variance -6.2%

Portfolio Characteristics

IMSCI 2011-1January 25, 2011


Transaction Overview

The collateral for this transaction consists of 16 fi xed-rate loans secured by 16 retail properties. All of the underlying loans are shadow-rated investment grade by DBRS based on the credit ratings of the transactions two sponsors, RioCan REIT (RioCan) and Calloway REIT (Calloway). Proceeds for each shadow-rated loan are fl oored at the respective sponsor rating within the pool and, the 16 loans in the transaction all have ten-year terms and amortize subject to a 30-year schedule. In addition, each individual loan has a full-recourse guarantee provided by the respective sponsor.

The transaction is a sequential-pay pass-through structure.

Rating Considerations

Strengths:• The transaction has strong, experienced sponsorship from two of Canada’s largest REITs and retail

landlords. • The loan pool benefi ts from strong, investment grade tenants including Wal-Mart, Canada Safeway,

Shoppers Drug Mart, Rona, Metro and Dominion (Loblaw Companies Limited).• The subject properties have historically reported stable occupancy rates and most recently reported

a weighted-average occupancy of 98.4%1. • The properties are generally well maintained and exhibit good curb appeal. By loan balance,

39.2% of the properties securing the loan pool have been constructed since 2000.

Challenges:• The loan pool is concentrated by property type and sponsorship.• Four loans (16.0% of the pool) are located in rural or tertiary markets.• The Wal-Mart leases all have at least two, and in most cases 16, fi ve-year extension options in-place

at the current terms, reducing the potential for increased cash fl ow at many of the properties in the future.

• As in many markets, spending in Canada declined during the recession due to reduced disposable income levels and higher unemployment. Retail sales from 2009 refl ected this, totaling $415.4 billion at year end, off 2.6% from 2008 (Colliers International Realty Advisors Inc.).

• A few of the properties have relatively low barriers to entry for new retail competition in the mar-ketplace as nearby vacant land is readily available.

• Ratings volatility associated with Classes D and E may be higher as the ratings are directly corre-lated to the ratings of RioCan and Calloway because of the recourse covenants on the loans. The majority of the loans would not in and of themselves be considered investment-grade without the recourse guarantee of the sponsor.

• There was limited tenant sales data provided for the underlying properties.

Stabilizing Factors:• DBRS takes into account concentrations when assessing the credit quality of underlying transac-

tions and the increased risk brought about by this concentration correlation has been factored into the ratings by subsequently increasing the individual loan probability of default.

• The pool is concentrated in Canada’s two largest provinces, 40.3% in Ontario and 27.6% in Québec.

• The majority of the transaction (84.0% of the pool) is located in urban or suburban markets.

1 Occupancy fi gures includes Contingent lease for largest tenant at Sandalwood Square Centre. See the DBRS loan summary for Sandalwood Square Shopping Centre on page 18.



• Wal-Mart, rated ‘AA’ by DBRS, represents 37.2% of the total NRA in the transaction, and all six of these Wal-Mart stores have been constructed, expanded and/or renovated since 2002. The locations are generally favourable, drawing customers from reasonable sized trade areas that face limited direct competition. In addition, the weighted-average REFI DSCR for these six loans of 1.16x and the exit debt yield of 11.5% both mitigate against the risk of stagnant cash fl ow.

• Many of the assets contractual base rent is provided by investment-grade tenants and in certain instances, these tenants are on long-term leases adding to the stability of the underlying cash fl ows.

• Royal Bank of Canada reports Canadian YE2010 retail sales are projected to bounce back with an increase of 4.8% over YE2009.

• The vast majority of leases at the subject are NNN, minimizing the risk of rising operating costs.

Loan Structural Features

Amortization: All 16 underlying loans are structured with 30-year amortization schedules and 10-year loan terms. The fi rst payment dates commence on February 1, 2011 with scheduled maturity dates on February 1, 2021. The loans all pay to a weighted-average coupon of 5.313%

Ownership Type: Each loan is secured by a fi rst priority mortgage on the fee interest of the associated retail property.

Transfer: With the exception of the allowances to follow, any direct or indirect sale, transfer or pledge of the borrowers, or any other loan parties, requires the consent of the servicer and rating agency con-fi rmation. However, the following permitted transfers require only rating agency notifi cation: a) the provided full-recourse guarantee of the related sponsor continues in full force and the related sponsor or an affi liate retain control property management at the property b) on an arms-length transfer, the related sponsor or an alternate professional management company, acceptable to the servicer in its sole discretion, becomes the manager of the property. Additional information on transfer restrictions can be found in the Offering Memorandum.

Recourse: Each loan is guaranteed on a full recourse basis by either RioCan or Calloway. RioCan is the benefi cial owner of 12 underlying properties and an affi liate of Calloway is the benefi cial owner of four assets within the transaction for which Calloway will provide the guarantee. RioCan and Calloway have a DBRS credit rating of BBB (high) and ‘BBB’, respectively.

Year Built Concentration Geographic Concentration

Before 199046%

Between 1990 & 200015%

Between 2000 & 2005

7%

After 200532%

Ontario

40.3%

Newfoundland and Labrador6.0%

Manitoba

10.5%

Alberta15.6%

Québec

27.6%



Prepayment: None of the mortgage loans are permitted to fully or partially prepay the outstanding principal balance prior to the scheduled maturity date (February 1, 2021). As a result, the issuer does not expect to collect any prepayment premium or yield maintenance charge on any mortgage loan. The borrower does have the right to pledge defeasance collateral consisting of non-callable Government of Canada bonds in exchange for the release of the underlying property.

Events of Default: Events of default include, among other items: a) if any payment of the mortgage loan is not paid when due; b) if any taxes or other charges are not paid when due; c) if any party trans-fers or encumbers the collateral in violation of the loan agreement; d) if a material default has occurred in any other provision or requirement under the respective mortgage.

Reserves: The two following reserve funds have been established:

• Value Village Lease Reserve• Cara Lease Reserve

The Value Village Lease Reserve relates to the Sandalwood Square Shopping Centre loan where the new lease to the property’s largest tenant is contingent upon the tenant obtaining a municipal business license by February 2011. The reserve had a $650,000 balance at loan closing and is to be used to cover any necessary tenant improvements, rental concessions and leasing commissions in the event that the business license is not obtained and the lease is terminated. The lease provides for Value Village to take possession on March 15, 2011 and to commence rental payments on July 15, 2011. For additional details on the reserve, please see the DBRS loan summary for Sandalwood Square Shopping Centre on page 18.

The Cara Lease Reserve pertains to the Cara 97th Street Edmonton loan as the lease at the subject property provides the tenant the right, prior to August 1, 2012, to demolish and reconstruct the building at the property. Should the tenant exercise this right, the borrower is obligated to provide the tenant with a construction allowance in the amount of $725,000 plus interest, payable in installments as construction proceeds. If the tenant opts not to reconstruct the building, the borrower is obligated to pay the tenant $55,000. Per the lease agreement, the tenant is to continue to pay rent throughout the construction period if they opt to reconstruct the building. A $750,000 letter of credit has been pledged at closing as additional security to satisfy the landlord’s obligations under this construction allowance in the event the tenant opts to reconstruct the building.

Substitution: Subject to the approval of the master servicer, the borrowers are permitted to obtain a release from the underlying mortgage by providing a replacement property as security provided the new collateral is in the same asset class, satisfi es the same underwriting requirements from origination (including maximum LTV and minimum DSCR requirements), as well as additional stated criteria. Any substitution is subject to a rating agency confi rmation per the loan documents. It is the opinion of DBRS that permitting substitution requirements have the potential to limit any positive ratings migra-tion that otherwise would be expected for improved credit metrics and amortization.

Unique Structural Features

Additional Debt: As of issuance, there is no additional debt outstanding within the transaction. With the exception of the allowances to follow, the mortgage loan documents generally do not permit any mortgages, charges or other fi nancial encumbrances to be incurred on any of the underlying proper-ties. However, additional debt can be added in the event a permitted, arms-length transfer of the



property occurs where the original sponsor continues to guaranty the loan and the benefi cial owner (RioCan, Calloway or a related entity) continues to manage the property, or with the consent of the servicer, an acceptable alternate professional management company, the seller (RioCan or Calloway) may provide fi nancing by taking a subordinate mortgage on the property provided the aggregate LTV does not exceed 85% and the whole-loan has a DSCR of 1.15x or higher.

Class X Certifi cates: There are two interest-only certifi cates in the transaction, Class XA and Class XB. Class XA holders will receive the lesser of 65% of the total monthly scheduled notional interest payments or the Class X notional interest payment and Class XB is entitled to any remaining Class X notional interest payment.

DBRS Sample

DBRS conducted a detailed analysis of all 16 loans in the pool and a site inspections were performed at 12 of the properties (79.0% of the pool by loan balance). The results of this analysis are outlined below.

DBRS Site Inspection Results

Loan Name% of Pool Market Type

Most Recent

Occupancy Largest Tenant% of NRA

Observed Property Quality

Kildonan Crossing Shopping Centre 10.5% Urban 97.2% Canada Safeway 32.1% Average

Welland SmartCentre 10.0% Suburban 100.0% Wal-Mart 64.8% Average

Sherbrooke SmartCentre 10.0% Suburban 100.0% Wal-Mart 63.6% Average

Fallingbrook Shopping Centre 9.8% Suburban 96.5% Metro 33.8% Average

Sandalwood Square Shopping Centre1 9.2% Suburban 100.0% Value Village 30.2% Average

Jasper Gates Shopping Centre 8.3% Urban 95.3% London Drugs 31.8% Average

Valleyfi eld SmartCentre 6.8% Suburban 100.0% Wal-Mart 66.4% Average

RioCan Durham Centre II 6.4% Suburban 100.0% Solutions 19.3% Did Not Inspect

Trinity Conception Square 6.0% Rural 95.5% Wal-Mart 31.4% Did Not Inspect

RioCan Vaudreuil-Dorion 5.6% Suburban 100.0% Bureau en Gros 26.1% Average

Lethbridge Towne Square 5.3% Suburban 93.5% London Drugs 32.3% Did Not Inspect

Magog SmartCentre 5.2% Tertiary 100.0% Wal-Mart 100.0% Average

New Liskeard Wal-Mart Centre 3.3% Rural 100.0% Wal-Mart 93.4% Did Not Inspect

Shoppers on Argyle 1.6% Tertiary 100.0% Shoppers Drug Mart 100.0% Average

Cara 107th Avenue Edmonton 1.3% Suburban 100.0% Swiss Chalet 73.3% Average

Cara 97th Street Edmonton 0.8% Suburban 100.0% Swiss Chalet 100.0% Average

1 Property is currently 100% leased with Value Village lease in conditional status. See the DBRS loan summary on page 18.

DBRS Underwriting ApproachA cash fl ow underwriting review was completed on every loan in this transaction. This analysis included reviewing the provided appraisals, engineer assessments and environmental reports and re-underwriting each loan.



DBRS generally adjusts cash fl ow to current, in-place rent and, in most instances, an additional vacancy adjustment is recognized to account for tenant credit quality and local market conditions. Generally, most expenses are recognized based on the higher of historical or the borrower’s budgeted fi gures. Real estate taxes and insurance premiums are adjusted to the higher of the most recent bill or the borrower’s budgeted fi gures. Capital expenditures are deduced based on the engineer’s infl ated estimates. No upside potential, such as anticipated rental increases or prospective tenants, is recog-nized by DBRS. DBRS will accept rent for tenants not yet in occupancy if a lease had been signed and the loan is adequately structured with a reserve or letter of credit.

DBRS net cash fl ow variances in this transaction were primarily driven by higher than contractual management fees, increased allowances for tenant improvements and leasing commissions as well as lower expense reimbursements. In certain instances, DBRS also applied a higher vacancy rate to non-anchor space when updated local market data was not available. This approach is consis-tent with the DBRS published underwriting methodology which can be found on at www.dbrs.com under Methodologies. In the case of expense reimbursements, many of the leases at the RioCan assets have contracted fees or surcharges paid by the tenant that can in certain instances, create an expense recovery ratio in excess of 100%. DBRS looked to the observed recovery ratios in the historical fi nancials at all the underlying properties when underwriting the expense reimbursements and capped the recoverable expense ratio at 100% where applicable before applying the underwrit-ten vacancy. DBRS recognizes the RioCan fees are contractual and that it is likely that several of the loans could report higher recovery ratios post issuance. The weighted-average net cash fl ow variance for the loan pool was -6.2%.

DBRS Term DSCR DBRS Refi DSCR

DSCR % of the Pool (Trust Balance)

% of the Pool (Whole Loan)

DSCR % of the Pool (Trust Balance)


0.00x-0.90x 0.0% 0.0% 0.00x-0.90x 0.0% 0.0%

0.90x-1.00x 0.0% 0.0% 0.90x-1.00x 0.0% 0.0%

1.00x-1.15x 0.0% 0.0% 1.00x-1.15x 88.0% 88.0%

1.15x-1.30x 6.8% 6.8% 1.15x-1.30x 22.0% 22.0%

1.30x-1.45x 78.0% 78.0% 1.30x-1.45x 0.0% 0.0%

1.45x-1.60x 10.0% 10.0% 1.45x-1.60x 0.0% 0.0%

1.60x-1.75x 5.2% 5.2% 1.60x-1.75x 0.0% 0.0%

>1.75x 0.0% 0.0% >1.75x 0.0% 0.0%

Wtd. Avg. 1.37x 1.37x Wtd. Avg. 1.12x 1.12x

DBRS Debt Yield DBRS Exit Debt Yield

Debt Yield % of the Pool (Trust Balance)


Debt Yield % of the Pool (Trust Balance)


0.0%-6.0% 0.0% 0.0% 0.0%-6.0% 0.0% 0.0%

6.0%-8.0% 0.0% 0.0% 6.0%-8.0% 0.0% 0.0%

8.0%-10.0% 94.8% 94.8% 8.0%-10.0% 0.0% 0.0%

10.0%-12.0% 5.2% 5.2% 10.0%-12.0% 94.8% 94.8%

12.0%-14.0% 0.0% 0.0% 12.0%-14.0% 5.2% 5.2%

14.0%-16.0% 0.0% 0.0% 14.0%-16.0% 0.0% 0.0%

>16.0% 0.0% 0.0% >16.0% 0.0% 0.0%

Wtd. Avg. 9.1% 9.1% Wtd. Avg. 11.1% 11.1%



Underlying Collateral

Loan Summary

Loan Name Loan Amount % of Pool

DBRS Shadow Rating

DBRS Term

DSCR (x)

DBRS Refi

DSCR (x)

DBRS Debt Yield

DBRS Exit Debt Yield

Kildonan Crossing Shopping Centre $21,700,000 10.5% BBB (high) 1.34 1.10 8.9% 10.9%

Welland SmartCentre $20,700,000 10.0% BBB 1.45 1.19 9.6% 11.8%

Sherbrooke SmartCentre $20,500,000 10.0% BBB 1.35 1.10 9.0% 10.9%

Fallingbrook Shopping Centre $20,200,000 9.8% BBB (high) 1.37 1.12 9.1% 11.1%

Sandalwood Square Shopping Centre $19,000,000 9.2% BBB (high) 1.37 1.11 9.1% 11.1%

Jasper Gates Shopping Centre $17,000,000 8.3% BBB (high) 1.30 1.06 8.6% 10.5%

Valleyfi eld SmartCentre $14,100,000 6.8% BBB 1.40 1.15 9.3% 11.4%

RioCan Durham Centre II $13,200,000 6.4% BBB (high) 1.30 1.06 8.6% 10.5%

Trinity Conception Square $12,300,000 6.0% BBB (high) 1.38 1.12 9.1% 11.1%

RioCan Vaudreuil-Dorion $11,500,000 5.6% BBB (high) 1.27 1.03 8.4% 10.3%

Lethbridge Towne Square $10,900,000 5.3% BBB (high) 1.35 1.10 8.9% 10.9%

Magog SmartCentre $10,700,000 5.2% BBB 1.62 1.32 10.8% 13.1%

New Liskeard Wal-Mart Centre $6,800,000 3.3% BBB (high) 1.36 1.11 9.0% 11.0%

Shoppers on Argyle $3,200,000 1.6% BBB (high) 1.37 1.12 9.1% 11.1%

Cara 107th Avenue Edmonton $2,600,000 1.3% BBB (high) 1.28 1.05 8.5% 10.4%

Cara 97th Street Edmonton $1,600,000 0.8% BBB (high) 1.41 1.08 9.4% 11.4%

Property Summary

Loan Name Property Type CityProv-ince

Year Built SF/Units

Loan per SF/

Units

Balloon Loan

per SF/Units

Kildonan Crossing Shopping Centre Anchored Retail Winnipeg MB 1988 179,033 $121 $99

Welland SmartCentre Anchored Retail Welland ON 2005 203,824 $102 $83

Sherbrooke SmartCentre Anchored Retail Sherbrooke QC 2005 210,307 $97 $80

Fallingbrook Shopping Centre Anchored Retail Ottawa ON 1988 97,109 $208 $170

Sandalwood Square Shopping Centre Unanchored Retail Mississauga ON 1989 107,060 $177 $145

Jasper Gates Shopping Centre Weakly Anchored Edmonton AB 1989 94,461 $180 $147

Valleyfi eld SmartCentre Anchored Retail Valleyfi eld QC 2002 161,236 $87 $72

RioCan Durham Centre II Unanchored Retail Ajax ON 1995 67,274 $196 $161

Trinity Conception Square Anchored Retail Carbonear NL 1979 182,433 $67 $55

RioCan Vaudreuil-Dorion Unanchored Retail Vaudreuil-Dorion QC 07-09 76,529 $150 $123

Lethbridge Towne Square Unanchored Retail Lethbridge AB 1990 79,396 $137 $112

Magog SmartCentre Anchored Retail Magog QC 2007 101,854 $105 $86

New Liskeard Wal-Mart Centre Anchored Retail New Liskeard ON 1997 110,522 $62 $50

Shoppers on Argyle Anchored Retail Caledonia ON 2006 17,024 $188 $154

Cara 107th Avenue Edmonton Unanchored Retail Edmonton AB 1980 11,963 $217 $178

Cara 97th Street Edmonton Unanchored Retail Edmonton AB 1980 8,690 $184 $151



Ownership and Management

Borrower Concentrations

Borrower Name DBRS Rating % of Pool

RioCan REIT 12 68.0%

Calloway REIT 4 32.0%

All 16 loans are sponsored by either RioCan or Calloway, both rated investment-grade by DBRS. These respective entities are the two largest operators of retail properties in the Canadian market. Each REIT focuses primarily on acquiring and operating larger format retail centres anchored by well known and successful tenants. In addition, both established trusts provide full-recourse guarantees for each of their respective loans.

RioCan Property Services internally manages all of RioCan’s assets within the transaction. The four Calloway sponsored properties are also all internally managed.

RioCan REITRioCan was originally formed in 1995 and today is Canada’s largest REIT with a total capitalization of approximately $10 billion as of September 30, 2010. It has a portfolio comprising of 289 income-producing retail properties, including 11 under development, with a total net rentable area of more than 66 million square feet. The portfolio primarily consists of unenclosed community shopping centres with tenants that focus on the provision of daily necessities. RioCan’s assets are well located in select markets across Canada, but mainly in Ontario, Québec and Alberta. The portfolio has a focus on growing urban markets but also consists of established properties serving smaller communities. As of Q3 2010, the average occupancy for RioCan’s overall portfolio was 97.1%, with 85% of gross rents generated by national tenants.

Recently, the trust has expanded into new U.S. markets through joint ventures with Cedar Shopping Centres Inc. and Inland Western Retail REIT. On August 11, 2010, DBRS confi rmed the rating of RioCan at BBB (high), with a Stable trend.

Calloway REITAs of September 30, 2010, Calloway’s portfolio totaled 24.2 million square feet and consisted of 119 properties with an additional ten under development. The REIT’s centres focus on value-oriented retailers with Wal-Mart serving as the primary anchor at 74 of these properties. Using Wal-Mart to attract both customers and other well known retailers to their centres is a strategy the REIT plans to continue as it continues to expand its portfolio. Calloway was formed in 2001 and as of Q3 2010, Calloway’s portfolio reported an overall average occupancy of 99.2%. On June 28, 2010, DBRS con-fi rmed the rating of Calloway at ‘BBB’, with a Stable trend. As previously mentioned, Calloway will handle all management responsibilities internally for properties included in this transaction.

Calloway has a business relationship with SmartCentres, which is a leading owner and developer of unenclosed, large-format shopping centres in Canada, and helps Calloway execute its core leasing strategy. It should be noted both companies share a common ownership (for more information see DBRS’s rating report on Calloway REIT).



Kildonan Crossing Shopping Centre

The loan is collateralized by a 179,033 sf anchored retail centre located in Winnipeg, Manitoba. The subject is currently 97.2% occupied by 32 tenants representing a mixture of national, regional and local retailers. The collateral consists of fi ve freestanding buildings and three outparcels con-structed in 1989. The centre is anchored by a 57,510 sf Canada Safeway (subsidiary of Safeway Inc., rated BBB by DBRS) grocery store. Canada Safeway (Safeway) has been a tenant since 1989 and executed a fi ve-year extension option in 2009 that extends its lease to 2014. Safeway has four remaining fi ve-year extension options on its lease. The second largest tenant is PetSmart, which occupies 14,187 sf on a lease that expires at the end of the loan term in 2021. The remaining tenants are national and regional retailers providing a variety of restaurant, service, and convenience store options for consumers.

Top Five Tenants

TenantSquare Footage % of NRA Base Rent

% of Base Rent Lease Start

Lease Maturity

Canada Safeway 57,510 32.1% $9.74 22.6% 01-Feb-89 31-Jan-14

Petsmart 14,187 7.9% $10.00 5.7% 29-Mar-10 31-Jan-21

The Bargain Shop 12,500 7.0% $6.50 3.3% 01-Feb-00 31-Jan-11

Royal Fork Buffet 9,086 5.1% $23.00 8.4% 01-Mar-99 31-Dec-11

New Directions for Children 8,107 4.5% $10.00 3.3% 01-Dec-08 31-Mar-19

The property is located at the intersection of Regent Avenue West and Lagimodiere Boulevard, approx-imately six kilometres west-northwest of the Winnipeg CBD. Directly to the north of the subject is a shopping centre anchored by a Sobeys grocer and a Rona home improvement store. One block east of the subject is Kildonan Place, a 460,000 sf regional shopping centre anchored by Zellers and Sears. Adjacent to Kildonan Place is Crossroads Station Shopping Centre, a big-box power centre anchored

LOAN SNAPSHOT

Trust Balance ($ million)$21.7

Loan psf/Unit 121

Percentage of the Pool (%)10.5%

Loan Maturity/ARDFebruary 2021

Amortization30 Years

DBRS Term DSCR1.34x

Refinance DSCR1.10x

Debt Yield8.9%

Exit Debt Yield10.9%



by Wal-Mart, Best Buy and Mark’s Work Warehouse.

The Winnipeg retail market has been fairly strong since the end of 2009, with an average vacancy rate between 3.5% and 3.9%, according to Royal LePage and Avison Young. Comparable market rental rates for the in-line space with less than 5,000 sf ranges from $10 to $25 psf, and $12 psf for the grocery anchor. The subject’s average rental rate of approximately $17 psf, excluding the grocery anchor, falls within market parameters for comparable stores. Safeway’s rental rate is signifi cantly below market.

RioCan REIT, rated BBB (high) by DBRS, provides a full-recourse guarantee for the loan. RioCan Property Services serves as the property manager for the loan collateral.

DBRS ANALYSIS

Site Inspection SummaryBased on the DBRS site inspection conducted on December 29, 2010, DBRS found the property quality to be Average.

The property is highly visible and has excellent access from the frontage road and Lagimodiere Boulevard, a six-lane highway, as well as from Regent Avenue West. Lagimodiere Boulevard is a major north-south thoroughfare which provides direct access north to Highway 101. There is ample parking provided in the main lot centered in front of the Safeway grocery, as well as additional spaces in front of and surrounding each of the buildings and outparcels. Additional access to the property is provided on all four sides of the site. The property has been well maintained and there was no visible deferred maintenance.

DBRS ViewpointThough the center is of older vintage than the nearby big-box power centre, the smaller service and restaurant tenants at the subject complement the surrounding large-format retailers. The Safeway has competition from the nearby Sobeys, but both stores are established and neither is a large enough format to dominate the market. In addition, Safeway exercised an extension option in 2009, showing its commitment to the space. The third largest tenant, The Bargain Shop, will be consolidating its presence in the market and vacating the Kildonan store in early 2011, two years prior to lease expiry. The Bargain Shop is paying $6.50 psf for a 12,500 sf space located in a desirable location in the centre directly next to the Safeway. The borrower has stated interest from a few different retailers to lease the entire space for $19 to $20 psf, but no fi rm commitments have been made. Over the course of the ten-year term, the loan will amortise down approximately 20% to $99.30 psf, which is an attractive debt level given the in-place rents of $16.86 psf.

Downside Risks:• The second largest tenant, The Bargain Shop, which represents 7.0% of the NRA, will be vacating

the centre on January 31, 2011.

Upside Potential and Stabilizing Factors: • DBRS did not include rent associated with The Bargain Shop in our underwriting analysis.

Additionally, although The Bargain Shop represents 7.0% of the NRA, they account for just 3.3% of the economic rent at the centre. The vacancy of The Bargain Shop will not trigger any co-tenancy clauses that would allow other tenants at the centre to terminate their lease or reduce their rental payments.



Welland SmartCentre

The collateral is a 203,824 sf power centre located in Welland, Ontario. The subject property consists of three buildings constructed between 2005 and 2009. Wal-Mart serves as the centre’s primary anchor and is subject to a lease that does not expire until 2026, fi ve years after loan maturity. Additional tenants include Rona, Mark’s Work Wearhouse and Dollar Giant. All four tenant leases commenced between January 2006 and August 2009 and the subject is currently 100% occupied. In addition, a 101,000 sf Canadian Tire ( non-collateral) serves as a shadow anchor for the subject property.

Top Five Tenants



Lease Maturity

Wal-Mart 132,114 64.8% $8.93 52.0% 19-Jan-06 18-Jan-26

Rona 52,687 25.8% $14.00 32.5% 07-Aug-09 06-Aug-29

Mark’s Work Wearhouse 10,073 4.9% $19.50 8.7% 30-Jun-08 29-Jun-18

Dollar Giant 8,950 4.4% $17.50 6.9% 14-Jul-08 14-May-18

Welland is located just southwest of Niagara Falls and approximately 130 kilometres south of Toronto and 25 kilometres west of the U.S. border. The property is situated in the north eastern section of Welland, immediately west of Highway 406. The City of Welland lies within the Regional Municipality of Niagara and is bisected by the Welland Canal which connects Port Courbourne (Lake Erie) to Port Weller (Lake Ontario). The western half of Welland has expanded in recent years, nearly merging with the nearby town of Fonthill. According to Financial Post Markets (FPM), the population of Welland will reach 53,000 in 2011 and have an average household income of $63,910 (20% below the national average). Currently, the city’s largest employer is Canadian Tire’s fi nancial services division, employ-ing an estimated 1,600 people within its two call centers.

The Wal-Mart at the subject is the only location in Welland, with the nearest store located in Niagara Falls, Ontario (approximately 20 kilometres away). Wal-Mart is scheduled to complete a 36,260 expansion of its space by March 2011, bringing its total square footage at the property to 168,374 sf. Since Wal-Mart fi nanced the expansion itself, there is no additional rental income for the new space. Seaway, a 120-store regional mall, is Welland SmartCentre’s biggest competitor in the area. The recently renovated mall is less than 2.5 kilometres west of the subject and was the former home to the city’s Wal-Mart until the tenant relocated to the subject property. Seaway is now anchored by Sears, Zellers, Winners, Shoppers Drug Mart and Cineplex Odeon.

LOAN SNAPSHOT


Loan psf/Unit 102




DBRS Term DSCR1.45x

Refinance DSCR1.19x

Debt Yield9.6%




Calloway REIT serves as the property manager. Calloway REIT, rated BBB by DBRS, provides a full-recourse guarantee for the loan.

DBRS ANALYSIS


The subject property is located on the island portion of Welland, which is surrounded by Welland Canal, a major transportation route between Lake Ontario and Lake Erie. The development is located just off Highway 406, the major north-south thoroughfare connecting Welland to Niagara Falls, pro-viding the retail centre with excellent visibility and convenient access. At the time of inspection the centre was very busy and the property’s 1,143 parking spaces appeared to be suffi cient. DBRS also noted that construction activity relating to Wal-Mart’s expansion did not appear to negatively affect traffi c to the store. Wal-Mart’s old signage had been recently removed and the company’s new logo had been moved to a new location.

There is limited commercial development in the immediate vicinity as the property is located in an area of Welland that has been experiencing growth in recent years. The property is located on Woodlawn Road, a major east-west route in the city, which also runs along the south end of neighbouring Seaway Mall. The property condition report noted no major deferred maintenance items at the property. The subject exhibits good curb appeal and is representative of a standard new format power centre.

DBRS ViewpointThe subject power centre is located in a growing market in Southern Ontario near other well estab-lished retail locations and exhibits good curb appeal. Two of the properties four tenants, Wal-Mart and Rona (combined 84.4% of base rent), are on long-term leases that extend well beyond the loan term, providing stability for the loan’s cash fl ow. In addition, both tenants are rated investment grade by DBRS. The collateral is the fi rst phase of the development with a designated area for an additional 250,000 sf to be added (not security for this loan). According to the issuer, construction on the next phase is slated to begin in late 2012. The subject also benefi ts from a strong non-collateral shadow-anchor, Canadian Tire, serving as a major draw to the centre.

While there is vacant land in close proximity to the subject, the property’s experienced sponsorship and strong tenant roster help mitigate the risk of increased competition in the future. The investment by Wal-Mart into its space also exhibits the tenant’s dedication to the centre and the local market. The ten-year loan amortizes on a 30-year schedule, reducing the loan’s exposure to $83 psf at maturity.

Downside Risks:• Wal-Mart’s lease consists of 16, fi ve-year renewal options at the same terms currently in-place,

reducing the potential for increased cash fl ow at the property in the future.• The additional phases (totalling 250,000 sf) planned at the development could compete with the

subject property.

Upside Potential and Stabilizing Factors: • All leases at the subject are NNN, minimizing the risk of rising operating costs.• In total, 93.1% of the property’s base rent is provided by investment-grade rated tenants.

Combined with the two in-place long term leases, they represent 84.4% of the base rent and



provide the property with stable cash fl ows. These lease structures mitigate nearly all of the risk of additional development phases competing with the subject upon completion.



Sherbrooke SmartCentre

This loan is secured by the fee interest in a 210,307 sf power centre located in Sherbrooke, Quebéc. The subject property consists of fi ve buildings constructed between 2005 and 2010. Wal-Mart serves as the centre’s primary anchor and is subject to a lease that does not expire until 2025, four years after loan maturity. Additional tenants include The Brick, Best Buy and L’Equipeur (aka Mark’s Work Wearhouse). TD Bank is scheduled to take occupancy of its new building upon completion of the tenant’s build out in March 2011, at which point the retail centre will be 100% occupied. The collat-eral is part of a larger development which includes a Home Depot and Canadian Tire.

Top Five Tenants


% of Base Rent Lease Start Lease Maturity

Wal-Mart 133,667 63.6% $6.44 39.1% 25-Jan-05 24-Jan-25

The Brick 30,140 14.3% $16.00 21.9% 11-Jun-09 10-Jun-24

Best Buy 25,750 12.2% $16.50 19.3% 08-Sep-09 31-Jan-20

L’Equipeur 12,069 5.7% $16.50 9.0% 20-Oct-05 19-Oct-15

TD Bank 5,211 2.4% $28.75 6.7% 01-Mar-11 28-Feb-21

The City of Sherbrooke is located approximately 148 kilometres east of Montréal and 102 kilometres west of the U.S. border. The property is situated on the north side of Autoroute 410, at the junction of Autoroute 410 and Autoroute 10, providing for excellent visibility and convenient access. Together, Sherbrooke, the Town of Magog and six surrounding boroughs combine to form the Sherbrooke Census Metropolitan Area which has a population of approximately 195,000. Sherbrooke is the primary economic, political and cultural centre of Québec’s Eastern Townships. It is home to several higher learning institutions with a combined annual enrolment of 40,000 students. The area has also continued to build on its reputation in recent years as a tourism destination for outdoor enthusiasts.

The Wal-Mart at the subject is the only location in Sherbrooke, with the nearest store located in Magog (approximately 23 kilometres away) which is also included in this transaction. Carrefour de L’Estrie, a 900,000 sf regional mall, is Sherbrooke SmartCentre’s biggest competitor in the area. Built in 1973, the mall is 2.5 kilometres from the subject and is occupied by Sears, The Bay, Sports Experts, Zellers, Super C, Rona, among others.

LOAN SNAPSHOT


Loan psf/Unit 97




DBRS Term DSCR1.35x

Refinance DSCR1.10x

Debt Yield9.0%




Calloway REIT serves as the property manager. Calloway REIT, rated BBB by DBRS, provides a full-recourse guarantee for the loan.

DBRS ANALYSIS


The subject property is well located within the City of Sherbrooke, near the intersection of two major highways which provides convenient access for both Sherbrooke locals and residents of neighbour-ing townships. The excellent signage at the property further enhances the visibility of the subject. At the time of inspection, the centre was very busy and the property’s 1,051 parking spaces appeared to more than adequately meet shopper demand. Besides the autoroutes to the west, there is limited com-mercial and residential development in the immediate area. The retail corridor continues south along Autoroute 410 and there is vacant land to the north and east of the subject. The property condition report noted no deferred maintenance at the property. The subject exhibits good curb appeal and is representative of a standard new format power centre.

DBRS ViewpointThe subject power centre is located in a secondary market and faces limited competition within its trade area. The property was recently constructed and has excellent frontage along Autoroute 410. Seven tenants make up the property’s rent roll, ranging in size from 1,530 sf to 133,667 sf. Two of these tenants, Wal-Mart and The Brick (combined 61.0% of the base rent), have leases extending at least three years beyond the loan term, providing stability for the loan’s cash fl ow through the loan term. In total, four of the tenants have been in occupancy since 2005, with the remaining tenants moving in between June 2009 and March 2011. The collateral also benefi ts from two strong shadow-anchors, Home Depot and Canadian Tire, each serving as major draws to the centre.

While there is developable land in close proximity to the subject, the property’s experienced sponsor-ship and strong tenant roster help mitigate the risk of increased competition in the future. In addition, Wal-Mart has room to expand its space at the property if the need arises, reducing the risk of the anchor vacating after loan maturity. The ten-year loan amortizes on a 30-year schedule, reducing the loan’s exposure to $80 psf at maturity. The loan benefi ts from full recourse to a BBB rated entity.

Downside Risks:• Wal-Mart’s lease consists of 16, fi ve-year renewal options at the same terms currently in-place,

reducing the potential for increased cash fl ow at the property in the future.• The barriers to entry for new retail competition in the marketplace are low, as vacant land in the

surrounding area is abundant.

Upside Potential and Stabilizing Factors: • The DBRS REFI DSCR of 1.10x and exit debt yield of 10.9% both mitigate against stagnant cash

fl ow.• All leases at the subject are NNN, minimizing the risk of rising operating costs.• DBRS considers the loan’s exposure at $97 psf to be reasonable given the property’s strategic

location near the intersection of Autoroute 10 and 410, which provides great visibility and conve-nient access for shoppers within a growing local market.



Fallingbrook Shopping Centre

The loan is collateralized by a 97,109 sf anchored retail centre located in Ottawa, Ontario. The subject is currently 96.5% occupied by 20 tenants that represent a mix of local, regional and national retail-ers and restaurants. The collateral consists of six buildings constructed between 1987 and 1992. The major draws to the centre are a 32,785 sf Metro (rated ‘BBB’ by DBRS) grocery store and a 21,852 sf Shoppers (rated A (low) by DBRS). Metro’s lease expires in August 2017 and its most recent reported sales fi gures are very high at over $600 psf. Shoppers’ lease expires in May 2022, more than one year after loan maturity. Other national tenants include The Beer Store, Tim Horton’s, Rogers Video and Subway. Average in-place rents are approximately $27 psf for non-grocery tenants.

Top Five Tenants



Lease Maturity

Metro 32,785 33.8% $15.00 21.9% 25-Aug-87 31-Aug-17

Shoppers Drug Mart 21,852 22.5% $31.42 30.6% 02-May-07 31-May-22

Beer Store The 5,500 5.7% $27.50 6.7% 01-Feb-88 31-Jan-13

Rogers Video 5,025 5.2% $25.00 5.6% 01-Jan-02 31-Dec-11

Joey’s Only Seafood 3,258 3.4% $14.00 2.0% 01-May-02 30-Apr-12

The centre is located at the intersection of Tenth Line Road and Charlemagne Boulevard in the Orleans neighbourhood of Ottawa, approximately 20 km east of the CBD. According to Cushman &Wakefi eld Ltd., the average Q2 2010 vacancy rate for neighbourhood shopping centres in Orleans, like the subject property, was 4.7%. This rate is slightly higher than the overall Ottawa retail vacancy rate of 2.9% for the same time period. Absorption was highest in the Orleans neighbourhood due to the new construction at Orleans Central, a former Canadian Tire site located adjacent to the subject property.

Comparable market rental rates for the in-line space (less than 5,000 sf) range from $24 to $32 psf, and $15 to $18 psf for the grocery anchor. The subject’s average rental rates are inline with these market parameters.


LOAN SNAPSHOT


Loan psf/Unit 208




DBRS Term DSCR1.37x

Refinance DSCR1.12x

Debt Yield9.1%




DBRS ANALYSIS

Site Inspection SummaryDBRS inspected the property on December 23, 2010 and found the property quality to be in Average condition.

The centre is located in a high traffi c area along Tenth Line Road, a major four-lane thoroughfare which provides access to Highway 174 which is just two km to the north. Highway 174 provides easy access to downtown Ottawa. There are a number of newer-built big-box retailers, including Home Depot, located south of the subject on Innes Road in a power-centre development, RioCan Orleans. The subject buildings are older brick construction, and many of the tenants have been in place since 1997. The exteriors are generally well-maintained. The interior build-out varies from store to store. Some of the nationals chain retailers have been renovated recently (i.e. Shoppers Drug Mart, Pizza Pizza), while many of the non-chain stores have older, original interiors. DBRS ViewpointThough the centre is less fl ashy than the newer big-box power centre format centres in the market, the majority of the tenant roster at Fallingbrook has been in occupancy for over ten years. Shoppers nearly doubled their leased square footage at the centre when they signed a fi fteen year lease extension in 2007. Metro grocery was recently converted from the Loeb brand and demonstrates Metro’s com-mitment to remaining in the market. The only vacancy at the centre is from a former CIBC branch, which built a new pad-site at the nearby borrower-owned power centre, RioCan Orleans. The combi-nation of anchor tenant expansion and extremely high grocery sales indicates that the property should continue to perform well over the loan term. The loan amortizes down by approximately 18% over the term to a balloon balance of $170 psf.

Downside Risks:• The largest tenant, Metro, is operating on a lease that expires in 2017, which is three years prior

to loan maturity.• The current and balloon loan per square foot are both high at $208 and $170, respectively.

Upside Potential and Stabilizing Factors: • RioCan Orleans, though newer and featuring the increasingly popular big-box power centre

format, serves to draw customers to the immediate area. • The property has a proven track record of commanding premium rental rates, with average

in-place rent of $27 psf for non-grocery tenants. These rates support the seemingly elevated loan per square foot.



Sandalwood Square Shopping Centre

Source: Colliers Inernational Realty Advisors

The loan is collateralized by a 107,060 sf anchored retail centre located in Mississauga, Ontario. The subject is currently 100% leased (Value Village lease has a continguency; see comments below) to 32 tenants representing a mix of local, regional and national retailers and restaurants. The collateral consists of fi ve buildings constructed in 1989.The largest tenant at the centre is Value Village, which recently signed a ten-year lease that expires in June 2021, just after loan maturity. The lease is contin-gent upon Value Village obtaining a municipal license prior to February 2011. A reserve was required at loan closing in conjunction with the Value Village lease, which is discussed further below. Value Village, also known as Savers, Inc. in the United States, is a for-profi t thrift and second-hand clothing retailer that has been in operation since 1954. The remaining tenant roster is comprised of national retailers such as Rogers Video, CIBC, McDonald’s, The Beer Store and the Bank of Montreal, as well as a number of local restaurant and convenience store operators. Excluding Value Village, no single tenant accounts for more than 5.4% of the NRA.

LOAN SNAPSHOT


Loan psf/Unit 177




DBRS Term DSCR1.37x

Refinance DSCR1.11x

Debt Yield9.1%




Top Five Tenants



Lease Maturity

Value Village1 32,282 30.2% $13.65 20.6% 15-Jun-11 14-Jun-21

Rogers Video 5,775 5.4% $19.00 5.1% 01-Feb-02 31-Jan-12

Sushi City 5,511 5.1% $24.00 6.2% 14-Sep-09 13-Sep-19

The Beer Store 5,399 5.0% $23.00 5.8% 01-May-90 30-Apr-15

Vibrin Drug Mart 5,075 4.7% $24.00 5.7% 20-Dec-99 19-Dec-141 Conditional Lease

The centre is located at the intersection of Bristol Road East and Hurontario Street in Mississauga, approximately 20 kilometres from downtown Toronto in the western section of the GTA. This location provides access to both Highways 401 and 403, less than two kilometres north and east of the subject property. Land uses to the north and west consist mostly of small and large scale industrial develop-ment. To the south and east lie several densely developed residential subdivisions which represent a large customer base for the subject property.

Comparable market rental rates for the in-line space with less than 5,000 sf ranges from $20 to $25 psf; the larger 32,282 sf Value Village space ranges from $10 to $18 psf. The subject’s average rental rate of approximately $22.78 psf, excluding the Value Village space, falls within market parameters for comparable stores. The Value Village rental rate is considered to be at market.


DBRS ANALYSIS

Site Inspection SummaryBased on the DBRS site inspection conducted on December 22, 2010, DBRS found the property to be in Average condition.

The centre exhibits good access and visibility at the intersection of Hurontario and Bristol Road East. This location is a short drive from the Highway 401, which exits directly onto Hurontario, and provides access to the GTA. There are large residential developments in the immediate area. The sub-ject’s 32 separate retail stores are spread out in a circle formation, with parking in the middle of the site. The subject was found to be highly visible with a large amount of automobile traffi c passing the site each day. The tenancy consisting largely of services like banks, restaurants and convenience stores.

DBRS ViewpointThe centre is well located in close proximity to dense residential properties and offers a variety of small-format shops that cater to the neighbourhood residents. Once Value Village and Mississauga Wellness have taken possession of their space, the center will achieve occupancy of 100%. A reserve was required at closing in the event that Value Village is unable to obtain a municipal licensee prior to February 2011. The borrower was required to reserve $650,000 to cover costs of fi nding a replace-ment tenant. This reserve represents approximately one and a half years of Value Village base rental payments and may be used to cover leasehold improvements, tenant inducements and leasing commis-sions. Though the majority of the leases are scheduled to expire during the loan term, more than half of the tenant roster has been at the centre since 2000 or earlier. The centre has achieved consistently high occupancy in excess of 95% by attracting and retaining tenants that cater to and depend on the



neighbourhood consumers. In addition, the surrounding area is home to three schools and a number of corporate offi ces. The centre does not compete with destination-type retailers that attract consum-ers from outside of the market, but the land density of the neighbourhood provides the traffi c and demand necessary to sustain the service and restaurant tenants that occupy the subject property. The loan amortizes down by approximately 18% over the term to a balloon balance of $145 psf.

Downside Risks:• Following the departure of Price Chopper in October 2010, the property does not offer a tradi-

tional anchor draw, nor is a shadow-anchor present on site.

Upside Potential and Stabilizing Factors: • The former Price Chopper space was immediately leased by the landlord to Value Village for a

ten-year term. Though the replacement of Price Chopper by Value Village results in the loss of a small-scale grocery tenant at the property, the expedient nature of the re-tenanting exhibits the desirability of space at the centre. Additionally, former tenant Moe’s Southwest Grill vacated in December 2010 and the space was immediately re-leased to another restaurant tenant, Bar Burrito, at $23 psf for a term of ten years. The draw for tenants at the property is the large consumer base provided by the surrounding high-density residential uses of the neighbourhood. DBRS designated the loan as Unanchored Retail for modeling purposes.



Additional Loans

The remaining eleven loans in the pool are a mix of anchored multi-tenant shopping centres, invest-ment-grade single-tenant properties and unanchored properties. The tenancy is a wide mix of national, regional, and local retailers, with a good portion of the tenant roster coming from investment-grade tenants on long-term leases. Wal-Mart, rated ‘AA’ by DBRS, represents 40.5% of the remaining collat-eral’s square footage. The fourteenth largest loan in the pool, which represents 1.6% of the allocated loan balance, is a stand alone Shoppers, rated A (low) by DBRS.

The remaining properties are located in markets that are generally a mixture of suburban, tertiary and rural. Three of the remaining eleven assets are located in Edmonton, with two being unanchored properties; however, these two loans are the smallest in the transaction (combined 2.0% of the pool balance). Only one of the Edmonton loans, Jasper Gates Shopping Centre, is located in a section of that market that is densely populated enough to be modeled as urban. Of the centres located in the most remote markets, Trinity Conception Square (Carbonear, New Foundland), New Liskeard Wal-Mart (New Liskeard, Ontario), Magog SmartCentre (Magog, Québec) and the Shoppers on Argyle (Caledonia, Ontario), all four properties feature an investment-grade largest tenant and three of the four properties are anchored by Wal-Mart.

Nine of the eleven properties are sponsored by RioCan. The remaining two loans are both sponsored by Calloway.

Servicing

Master and special servicing responsibilities will be handled by Midland Loan Services (Midland), a division of PNC Financial Services Group. Midland is one of the largest CMBS servicers and is headquartered in Overland Park, Kansas. As of September 30, 2010, Midland had a CMBS servic-ing portfolio totalling 363 transactions with an outstanding principal balance of $137.5 billion. Separately, Midland’s an active special servicer in 158 CMBS transactions ($68.3 billion). DBRS has had many years of positive interaction with Midland as servicer in both U.S. and Canadian CMBS transactions. As of December 31, 2010, Midland served as master servicer for 36 Canadian CMBS transactions ($10.3 billion) and special servicer for 33 Canadian CMBS transactions ($9.8 billion).

Surveillance

DBRS will perform monthly analytics, surveying the portfolio for delinquencies, prepayments, loan trigger events, and any corresponding DSCR volatility. Any ratings actions, inclusive of confi rmations, will be sent via DBRS letter to the custodian.

CMBS Rating Methodology - Highlights

DBRS begins its rating process by sampling the loan pool. Some CMBS transactions consist of a sin-gle-borrower, or single loan, or multiple large loans, with very little diversifi cation and high asset and market correlations. Because of the concentration of these small pools of loans, DBRS will generally review or sample all loans within the pool as the event risk associated with any one asset is higher than a truly diversifi ed pool. DBRS performs site inspections and management meetings (when available)



for sampled properties. For multiple property loans, DBRS may choose to inspect a sample of the properties. In addition, DBRS reviews all third-party reports provided by the Issuer, including engi-neering and environmental reports, to ensure no signifi cant contingencies exist, such as environmental contamination, structural faults or deferred maintenance. The appraisal is reviewed for historical usages, market dynamics and competitive property statistics. All third-party reports are typically provided by large, well known fi rms and while commissioned as part of the loan origination process these reports are conducted independently from the Issuer or loan seller. Finally, DBRS determines a stabilized net cash fl ow for each asset.

DBRS Direct Sizing ApproachDBRS sizes single-borrower or large loan CMBS transactions to determine a base credit enhancement using a direct sizing approach. The direct sizing approach focuses specifi cally on a capacity of debt analysis and credit enhancement is determined for each loan based on property specifi c parameters outlined in Appendix D of the CMBS Rating Methodology which can be found at www.dbrs.com under Methodologies. Each rating category in the direct sizing approach implies, and requires, a different level of confi dence, or a different margin of safety. The amount of stress applied refl ects the robustness that each rating category requires and that the DSCR and LTV parameters have been adjusted accordingly. These stresses are ultimately used to determine the ratings of the transaction as the cumulative proceeds at each rating category create base subordination levels that are then used to compare and assign ratings to the proposed structure.

Direct Sizing ParametersThe direct sizing approach measures a loan’s capacity of debt based on its ability to service its debt service obligations and the perceived equity in the transaction. The DBRS direct sizing parameters outlined in Appendix D of the CMBS Rating Methodology, which can be found at www.dbrs.com under Methodologies, were constructed based on observations of loan-level data and property per-formance of a large sample of assets. The inputs DBRS uses in the direct sizing approach are Term DSCR, Refi nance DSCR, Going-in LTV or Exit LTV. The more constraining parameter will act as the primary driver for the direct sizing of the loan and the Exit Debt Yield will be reviewed as a check and balance to ensure that the broader DSCR and LTV measures are refl ective of appropriate debt loads given an asset’s stabilized NCF. Both Term and Refi nance DSCR’s are determined for every loan in a pool, at each rating category (AAA, AA, A, BBB, BBB (low), BB and B). The DSCR’s used at each rating category refl ect different stresses that DBRS applies to the loans by property type, with the term DSCR refl ecting varying degrees of cash fl ow stress per rating category, over a fi xed/contractual debt service and the refi nance DSCR refl ecting a fi xed/stabilized cash fl ow over a stressed refi nance debt service per rating category. Likewise, both Going-in and Balloon LTV are determined for every loan in a pool at each rating category.

Adjustment FactorsThe direct sizing parameters can be adjusted for several different factors, some quantitative, and others that refl ect an analyst’s assessment of property qualities.

Concentration RiskDBRS recognizes that all pools have different concentration characteristics which may erode the benefi t of diversifi cation. Concentration is diffi cult to capture systematically. The direct sizing approach assumes a single loan and single asset and therefore the parameters can be adjusted at the loan level within the ranges found in Appendix D of the CMBS Rating Methodology, which can be found at www.dbrs.com under Methodologies, to account for the varying degrees of concentration such as multiple loans, with multiple properties, across multiple geographic areas or a combination thereof.



Property QualityThe highest quality properties within a market often exhibit signs of viability such as the attractiveness to new tenants; therefore indicating cash fl ow stability. To evaluate property quality, DBRS consid-ers the location, functional utility of the asset, the comparability of the surrounding and competing properties, and the quality of construction, property condition, ingress and egress, and the property amenities. The property quality may warrant a reduction in the debt constant or capitalization rate applied to the DBRS stabilized NCF.

Sponsorship StrengthDBRS defi nes a strong sponsor as one that is fi nancially capable of doing that which is economi-cally advisable and structured in a way that does not preclude or diminish the likelihood of capital contributions in the event of economic stress. Although fi nancial capability does not suggest that a borrower will cover debt service payment shortfalls unless there is signifi cant equity to protect, neither will they cover refi nancing shortfalls in an over-levered asset. , DBRS generally recognizes strong sponsors are less likely to default due to a short-term cash fl ow shortfall and less likely to exacerbate the losses in the event that their equity has eroded. An analyst’s assessment of sponsorship strength may cause an adjustment within the property underwriting to determine DBRS stabilized NCF. For example, a sponsor who has expansive networks and management expertise will often be able to attract tenants and keep vacancy to a minimum and thus the property may outperform the market as a result. Alternatively, a strong sponsor may have greater access to capital and therefore a lower refi nance constant could be applied to the DBRS stabilized NCF as they may be able to obtain more favourable rates.

Single TenantDBRS recognizes further risk associated with properties that are leased by a single tenant. Often such arrangements can be mitigated by a loan’s structural features (e.g. reserves, letter of credits, guaranteed leases that extend well beyond the loan maturity, etc.). However, such concentrations in a property’s cash fl ow otherwise present a signifi cant event risk that justifi es an adjustment to a loan’s probability of default, over and above the cash fl ow volatility adjustments already taken.

MarketDBRS recognizes that in times of economic stress, real estate capital focuses on more highly populated markets with comparatively higher transparency. As such, defaulted loans in tertiary or rural markets will experience signifi cantly higher losses, due to a limited investor base and market ineffi ciencies. Markets are systematically categorized based on population density within a given postal code. DBRS has measured the impact of market liquidity on credit loss which shows that loans located in dense urban locations are likely to experience lower losses and as markets become more sparsely populated, rural and/or illiquid the loss increases.

Owner OccupiedDBRS recognizes the additional risk inherent in having an owner occupied or partially owner occupied property. The risks associated with interruptions in a property’s revenue stream are compounded by risks associated with the borrower’s operating business. If the space is occupied by a business that is the borrower’s life blood, the probability that the borrower will continue to fund debt service, despite a downturn, is greater. However, loss given default would be infl ated because the result could be negative cash fl ow compounded by a specialty use build-out. As such, DBRS will use the higher end of the direct sizing parameters to account for owner occupied properties.



Loan SizeSize has an impact on a loan’s severity of loss given default. In general, it is observed that the larger the loan, the lower the severity of loss given default, as a percentage of principal. This can be explained, in part, by the fi xed expenses associated with a workout, foreclosure or specially serviced asset, which are disproportionably large for smaller loans. It may also be explained by the nature of assets encumbered with large loan balances, which - all else being equal - tend to be located in more liquid markets, and have more sophisticated borrowers and operators. Loan size adjustments are often captured in the market or property quality adjustment, but would sway the analyst to use an upper or lower bound of a range in the direct sizing parameters if necessary.

Freehold and Leasehold InterestsThe DBRS CMBS Rating Methodology, which can be found at www.dbrs.com under Methodologies, assumes loans are secured by either a leasehold or a freehold interest in the property. Having a freehold interest in a commercial real estate asset assumes you have a valuable asset into perpetuity; one that creates revenue and likely appreciates. A leasehold effectively splits an asset into two ownership inter-ests: freehold and leasehold. The freehold interest maintains ownership in the land and enters into a long-term lease (typically at least 20 years with multiple extension options). The leasehold estate is specifi cally intended to enable the lessee to develop an income-producing asset (improvements) on the site, which then enables the lessee to recover construction costs and a return on capital prior to maturity of the initial term of the lease.

The leasehold interest, whose term is fi nite, is viewed as a wasting asset that becomes totally worthless when occupancy rights revert to the freeholder at the termination of the ground lease. DBRS insists on an amortization term expiring 10 years prior to the ground lease termination and will adjust its debt constant in the model as if structured with a shorter schedule. In addition to the refi nance aspect, DBRS considers more factors that may cause a property subject to a ground lease to have lower cash fl ow stability resulting in a higher probability of default and potentially increased loss severity. Factors DBRS considers include contractual ground rent escalations, leasehold mortgagee’s notice of default and right to cure provisions and the leasehold mortgagee’s rights to become the borrower in the event of enforcement.

RecourseLoans that have enforceable recourse to a fi nancially capable guarantor are expected to have lower probability of defaults. In the event the recourse is to an investment-grade rated entity, it would imply that the unsecured debt would be rated investment-grade. As such, mortgages carrying a full recourse covenant from an investment-grade rated entity will be fl oored at the guarantor’s rating. While gen-erally viewed as a positive, it is diffi cult to quantify the impact of recourse. Therefore, loans with recourse to non-investment grade rated guarantors are considered on a case-by-case basis.

Operational Risk ReviewsDBRS reviews loan originators, servicers and operating advisors (if applicable) apart from transaction analytics and determines whether they are acceptable parties.

RatingsDBRS CMBS ratings address the risk that an issuer will fail to satisfy its fi nancial obligations in accor-dance with the terms under which an obligations has been issued. DBRS does not rate to the expected or scheduled maturity date set forth by the issuer and therefore, while DBRS will identify transactions and certifi cates that have considerable extension risk, the ratings are not impacted as loans extend. DBRS ratings on interest-only certifi cates address the likelihood of receiving interest based on the

Copyright © 2011, DBRS Limited and DBRS, Inc. (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources believed by DBRS to be accurate and reliable. DBRS does not perform any audit and does not independently verify the accuracy of the information provided to it. DBRS ratings, reports and any other information provided by DBRS are provided “as is” and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fi tness for any particular purpose or non-infringement of any of such informa-tion. In no event shall DBRS or its directors, offi cers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verifi ed and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT http://www.dbrs.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON http://www.dbrs.com.

Note: All fi gures are in Canadian dollars unless otherwise noted.This report is based on information as of January 24, 2011. Subsequent information may result in material changes to the rating assigned herein and/or the contents of this report.



notional amount outstanding. DBRS considers the interest-only certifi cate’s position within the trans-action payment waterfall when determining the appropriate rating.

The methodology providing DBRS’s processes and criteria is available by contacting us at [email protected] or by clicking on Methodologies at www.dbrs.com.

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Notes

ADR = average daily rateAvg. HH = 2000 average annual household incomeBR = bedroomcapex = capital expendituresCBD = central business district CMBS = commercial mortgage-backed securitiesDSCR = debt service coverage ratioEGI = effective gross incomeF&B = food & beverageFF&E = furniture fi xtures & equipmentG&A = general and administrativeGPR = gross potential rentIO = interest onlyLC = leasing commissionLTV = loan-to-valueMHC = mobile home communityMTM = month to monthMSA = metropolitan statistical arean.a. = not availablen/a = not applicableNCF = net cash fl owNNN = triple netNOI = net operating incomeNRA = net rentable areaNR – PIF = not rated – paid in fullOSAR = operating statement analysis reportPPL = pari passu loanpsf = per square footR&M = repairs & maintenanceREIT = real estate investment trustRevPAR = revenue per available roomsf = square foot/square feetSPE = special purpose entityTI = tenant improvementTIC = tenants in commonT-12 = trailing 12 monthsUW = underwritingWA = weighted averageWAC = weighted-average couponWH = warehousex = timesYE = year-endYTD = year-to-date

Glossary

Glossary

capital expenditure (capex) – Costs incurred in the improvement of a property that will have a life of more than one year.

debt service coverage ratio (DSCR) – A measure of a mortgaged property’s ability to cover monthly debt service payments, defi ned as the ratio of net operating income (NOI) or net cash fl ow (NCF) to the debt service payments.

effective gross income (EGI) – Rental revenue minus vacancies plus miscellaneous income.

issuer UW – Issuer underwritten from Annex A or servicer reports.

loan-to-value (LTV) – The ratio between the principal amount of the mortgage balance, at origination or thereafter, and the most recent appraised value of the underlying real estate collateral, generally from origination.

net cash fl ow (NCF) – The revenues earned by a property’s on-going operations less the expenses associated with such operations and the capital costs of tenant improvements, leasing commissions and capital expenditures (or reserves). Moreover, NCF is net operating income (NOI) less tenant improvements, leasing commissions and capital expenditures.

NNN (triple net) – A lease that requires the tenant to pay operating expenses such as property taxes, insurance and maintenance, in addition to the rent.

net operating income (NOI) – The revenues earned by a property’s ongoing operations less the expenses associated with such operations but before mortgage payments, tenant improvements, replacement reserves and leasing commissions.

net rentable area (NRA) – The area (sf) for which rent can be charged. NRA includes the tenant’s premises plus an allocation of the common area directly benefi ting the tenant, such as common corridors and restrooms.

revenue per available room (RevPAR) – A measure that divides revenue by the number of available rooms, not the number of occupied rooms. It is a measure of how well the hotel has been able to fi ll rooms in the off-season, when demand is low even if rates are also low, and how well it fi lls the rooms and maximizes the rate in the high season, when there is high demand for hotel rooms.

tenant improvements (TIs) – The expense to physically improve the property or space, such as new improvements or remodelling, paid by the borrower.

weighted average (WA) – Calculation is weighted by the size of each mortgage in the pool.

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